Franklin Resources, Inc. (Franklin Templeton) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2024. The filing entity is Franklin Resources, Inc. (NYSE: BEN).
Business context and AUM
Franklin is a global investment manager earning fees from investment management, distribution, fund administration and shareholder services. Results are strongly affected by assets under management (AUM), asset mix, investment performance and fee rates. On January 1, 2024, Franklin acquired Putnam Investments.
- AUM was $1.645 trillion at March 31, up 16% year over year and 20% from September 30, 2023. The increase included $148.3 billion from Putnam and positive market effects.
- Quarterly average AUM rose 11% year over year to $1.581 trillion; six-month average AUM rose 8% to $1.492 trillion.
- Quarterly long-term net inflows were $6.9 billion, offset partly by $4.8 billion of cash-management outflows. Six-month long-term net inflows were $1.9 billion.
Financial performance
| Metric | Three months ended March 31, 2024 | Year-over-year change | Six months ended March 31, 2024 | Year-over-year change |
|---|---|---|---|---|
| Operating revenue | $2.153 billion | +12% | $4.144 billion | +6% |
| Operating income | $129.3 million | -49% | $335.8 million | -25% |
| Operating margin | 6.0% | 13.2% prior year | 8.1% | 11.5% prior year |
| Net income attributable to Franklin | $124.2 million | -36% | $375.5 million | +4% |
| Diluted EPS | $0.23 | $0.38 prior year | $0.71 | $0.70 prior year |
Adjusted non-GAAP operating income was $419.6 million for the quarter (-5%) and $836.6 million for six months (essentially flat). Adjusted operating margins were 25.2% and 26.2%, versus 28.9% and 28.2%, respectively. Adjusted net income was $306.6 million for the quarter (-3%) and $635.1 million for six months (+10%); adjusted diluted EPS was $0.56 and $1.21. These measures exclude specified items and are not substitutes for GAAP results.
Quarterly revenue growth reflected higher average AUM and Putnam revenues. Quarterly operating expenses rose 21% to $2.024 billion, including higher compensation, distribution, technology, occupancy and administrative costs. Putnam-related retention, acquisition and integration expenses weighed on reported operating income. The effective investment-management fee rate excluding performance fees was 41.4 basis points for the quarter, compared with 41.8 basis points a year earlier.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $115.3 million, compared with negative $329.6 million a year earlier. Investing cash flow was negative $410.8 million; financing cash flow was positive $232.1 million. Cash and cash equivalents declined $278.1 million to $4.124 billion, including cash held by consolidated investment products.
- Management’s liquidity measure, excluding third-party assets of consolidated investment products, was $5.764 billion at March 31, versus $5.873 billion at September 30. It comprises cash, receivables and certain investments.
- Franklin corporate debt was $3.041 billion, slightly below $3.053 billion at September 30. Separately, consolidated investment products had $9.131 billion of debt; the filing says their debt holders have no recourse to Franklin’s assets beyond Franklin’s direct investments.
- Franklin had an undrawn $800 million revolving credit facility and was in compliance with debt covenants. A $250 million senior-note maturity was due in July 2024; management intended to repay it from existing cash or other liquidity sources.
Material developments, outlook and risks
- Putnam acquisition: Total purchase consideration was $1.232 billion, including 31.6 million Franklin shares, cash paid and deferred cash consideration. Putnam contributed approximately $210 million of revenue from January 1 through March 31; separate net income was unavailable due to integration. The purchase-price allocation remains preliminary.
- Franklin incurred $103 million of Putnam-related acquisition compensation and benefits expense during the six months. It expects about $130 million of additional acquisition-related retention expense in the rest of fiscal 2024, followed by approximately $190 million in fiscal 2025, declining in subsequent years.
- Franklin expects to pay $100 million of deferred Putnam consideration in fiscal Q3 and may pay up to $375 million between the third and seventh anniversaries of closing, tied to revenue-growth targets. It also paid $400 million of deferred Lexington consideration on April 1, 2024.
- Management expects to continue comparable quarterly dividends, subject to earnings and other relevant factors, and anticipates prioritizing business investment alongside dividends and opportunistic share repurchases. Six-month dividends declared were $0.62 per share.
- A new New York office lease recognized a $396.6 million right-of-use asset and lease liability; the lease runs over 16 years with aggregate expected commitments of $707.3 million.
- Management cited uncertain economic and regulatory conditions and emphasized investment performance, client service, expense management and strategic investment. Principal disclosed risks include market and investment-performance volatility, competition, operational and technology/security issues, human capital, and legal and regulatory risks. No material risk-factor changes were reported.
- Management said ordinary-course litigation is not expected to materially affect the company and that no material loss was considered probable or reasonably possible under indemnifications and guarantees. Disclosure controls were assessed as effective.
Other reporting item
Franklin revised comparative 2023 figures after identifying uneliminated investment income in certain consolidated limited partnerships. The correction reduced prior-period reported investment and other income and net income, with offsetting noncontrolling-interest adjustments; it did not affect Franklin-attributable net income, EPS, operating income, assets, liabilities or equity. The company determined the prior financial statements were not materially misstated.
Important facts for investors to verify
- How Putnam integration, synergies and the expected retention and contingent-payment costs affect margins and cash generation.
- Whether AUM growth continues to translate into durable net inflows and fee revenue, particularly given quarterly cash outflows and higher long-term redemptions.
- The sustainability of the reported and adjusted margin trends, and the size and duration of excluded acquisition-related and other adjustment items.
- Liquidity after the July 2024 note repayment and deferred acquisition payments; distinguish Franklin corporate debt and cash from consolidated investment-product balances.
- Future performance-fee variability and investment performance: the filing notes that past performance is not indicative of future results.